Why You May Not Want Venture Capital

There’s something about the appeal of venture capital that makes every entrepreneur’s knees turn to jelly. So much money and so easy to get. (Well actually not that easy.) Unfortunately the reality of venture capital is not as good as the dream. The dream is sort of like the gold rush.

Facts will show that only a few hundred people out of the thousands who went to the Klondike actually got rich from gold. The same is true for entrepreneurs and venture capital. We read a lot about the very few who do very well and we dream of being one of them. So since I love metrics, here are a few that you should understand:

Quick and dirty VC facts

1500 companies get venture capital financing every year

350 VC Backed companies are sold every year and 50 go public

Of the 350 that are sold, only 26% get a return better than 4 times

That means that only 12% of VC backed deals are successful.

As a result, the VC industry performs worse than any other major index.

And since returns are concentrated in a few firms about 85% of VCs lose money

But while the VC firms lose money, their partners still make excellent money.

Research has shown that if you’re looking at a career as an employee or a venture backed entrepreneur, the money is about the same. When you factor in success rates, getting venture capital money means on average you’ll do about as well as if you got a job instead. If you want more facts they’re in the slide deck.

Outliers

Now of course there are outliers. These are the Sequoia, Bessemer, Andreason Horowitz etc. who have the best connections, invest in all the best deals, hire the best teams and get the best results. Maybe I’m jaded but if you’re thinking about traditional VC money and it isn’t from one of the top 10 or 20 firms, think again. This video is something I did a few years ago and some of it still applies.

Now you might not believe me but you might believe the New York Times so read this.